Public Economics Lectures Part 1: Introduction

Partial Equilibrium Model: Setup
Two goods: x and y
Consumer has wealth Z, utility u(x) + y, and solves
max u(x) + y s.t. (p + t)x(p + t, Z ) + y(p + t, Z ) = Z
x,y
Firms use c(S) units of the numeraire y to produce S units of x
Marginal cost of production is increasing and convex:
c ′ (S) > 0 and c ′′ (S) ≥ 0
Firm’s profit at pretax price p and level of supply S is
pS − c(S)
Public Economics Lectures () Part 3: Effi ciency 7 / 105